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ECB & Fed interest rate decisions dominate the week

Market drivers kick off the new month in style.. 



It was an unexpectedly strong week for the Pound last time out, which saw it round off another positive April. Will it be a crash back down to reality this week though, seeing as May is historically a poor month for Sterling and the US & EU central banks are expected to raise interest rates?!

Whatever the outcome, GBP has beaten all-the-odds and traded favourably most of the year so far as recession fears subside after stronger than expected economic data. This is our way of saying; don't be too downbeat if the £ takes a negative turn in the coming days or weeks (potentially the case)..

Yet more good data was released out of the UK this morning however, as house prices for April surprised to the upside. After multi-month declines, a rise of 0.5% came out-of-the-blue with consensus showing an expected fall of -0.4%. It lifts the annual figure to -2.7%, but, most economists see the result as a blip rather than a sign of emerging stability. Still, it's more proof that the UK is weathering the storm relatively 'comfortably' at the moment. 

It will be either a 25bp or 50bp call from the ECB on Thursday and the market will be watching closely to whether forward guidance is provided and if so, how much. A month-by-month data approach has been taken recently by the central bank, but there is no doubt more hikes are incoming for the months ahead. 

With the news expected to improve the single currency on release, it may be the start of a strong run for the Euro (although this was supposed to begin last week). The €-£ rate is unchanged month-on-month with the €-$ up 1% in the same time-frame. 

The Dollar has been weakened since the recent fallout of investment banks in the US and now nerves are rising about the debt ceiling standoff. How the Government expects to pay its bills is intriguing business, especially ones that are as big as theirs. A default remains a long-shot at the moment, but the market wants to know where the money is to come from to determine whether it strengthens the currency or not. 

The imminent Fed interest rate decision is a big one. Do they hike a further 25bp or do they think they have inflation under control now and do nothing? The former brings initial strength, the latter sees immediate weakness in USD..